A personal loan (also known as a consumer loan) describes any situation in which an individual borrows money for personal need, including making investments in a company.
All personal loans have three common elements:
- Evidence of the debt (promissory note)
- An amount borrowed (principal)
- The cost of borrowing (interest rate)
When the repayment terms of a loan are met, the promissory note is retired. If loan payments are not made as agreed, the lender can use the legal system to recover its money.
Mortgages for homes or cottages fall into the category of consumer loans, but they are not typically referred to as personal loans.
More about personal loans
Personal loans can be repaid in many different ways including:
- Interest-only payments
- Full or partial payments
- Equal, monthly, blended payments
- Equal, monthly payments of principal + interest
- Interest-only with periodic balloon payments
- Interest-only with one balloon payment
- Accelerating or decelerating payments
They may also be secured (backed by collateral) or unsecured.